This page has been archived and commenting is disabled.
Silver Market Change Report 5 July, 2015
The prices of the metals drooped further this shortened week (Friday was a holiday in the US, as the Fourth of July, Independence Day, occurred on Saturday). The S&P 500 index also fell this week, as did crude oil.
Markets all over the world are beginning to feel shocks from Greece. As we write this, on Sunday evening Arizona time, the Greeks voted “No” to the terms of the bailouts offered them. The simple fact is that Greece cannot pay. What they cannot pay, they will not. What they don’t pay, has to be written off by whomever holds it as an asset. Some of these write-offs will obligate European governments to pay in more euros to recapitalize the now-insolvent entities. For example, countries like Spain that need bailouts themselves will have to contribute to the European Central Bank.
A Greek default is not about the size of its GDP, but about the size of the holes blown out of various balance sheets, where Greek debts used to be marked as their assets. We don’t know precisely how much the Greek government, Greek central bank, Greek commercial banks, and other Greek debtors owe. According to Demonocracy, the total is €360 billion (and they have a very cool infographic to illustrate it). We suspect that, at the end of the day, the number turns out to be greater than that.
The Greek default is a forcible contraction of credit (Keith’s definition of deflation), and bound to be negative for the prices of ordinary assets. That said, something extraordinary has occurred in the silver market this week.
Read on, for the only accurate picture of the supply and demand conditions in the gold and silver markets, based on the basis and cobasis.
First, here is the graph of the metals’ prices.
The Prices of Gold and Silver
We are interested in the changing equilibrium created when some market participants are accumulating hoards and others are dishoarding. Of course, what makes it exciting is that speculators can (temporarily) exaggerate or fight against the trend. The speculators are often acting on rumors, technical analysis, or partial data about flows into or out of one corner of the market. That kind of information can’t tell them whether the globe, on net, is hoarding or dishoarding.
One could point out that gold does not, on net, go into or out of anything. Yes, that is true. But it can come out of hoards and into carry trades. That is what we study. The gold basis tells us about this dynamic.
Conventional techniques for analyzing supply and demand are inapplicable to gold and silver, because the monetary metals have such high inventories. In normal commodities, inventories divided by annual production (stocks to flows) can be measured in months. The world just does not keep much inventory in wheat or oil.
With gold and silver, stocks to flows is measured in decades. Every ounce of those massive stockpiles is potential supply. Everyone on the planet is potential demand. At the right price, and under the right conditions. Looking at incremental changes in mine output or electronic manufacturing is not helpful to predict the future prices of the metals. For an introduction and guide to our concepts and theory, click here.
Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It ended unchanged this week.
The Ratio of the Gold Price to the Silver Price
For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.
Here is the gold graph.
The Gold Basis and Cobasis and the Dollar Price
The dollar rose (i.e. the price of gold, measured in dollars, fell). Scarcity (i.e. the cobasis, the red line) rose with the move. This is the pattern that repeats time and again. When speculators buy futures contracts, the price of the dollar falls and the scarcity of gold falls with it. This week, speculators sold gold, driving up the price of the dollar (to 26.67mg) and the scarcity of gold rose as well.
The fundamental price of gold did not change at all. It’s still 30 bucks over the market price.
Now let’s look at silver.
The Silver Basis and Cobasis and the Dollar Price
Last week, we said:
“The fundamental price of silver rose a nickel this week. It’s $17.39. [thanks to a reader who caught the typo—the correct number was $15.39.]”
And the price this week dipped several times to about $15.46. That is pretty darned close, and closer than it had gotten in years.
In the big picture, the price did not move much on the week. However, look at that red cobasis line go. It was a mere 7 basis points last Friday. It ended this week at 100 bps. The cobasis of farther-out contracts also rose proportionally.
Suddenly, the silver market is firm.
Think like an arbitrager for a minute. It’s possible to earn 1% annualized, on a simple trade with no risk (as conventionally understood). Just sell a bar of silver and buy a contract for
September delivery—called decarrying the metal. The trade matures in no more than 3 months, and you end where you started (plus the free 1% profit). Show us any other investment that pays so much for so little duration, and it will have “risk” written all over it.
And yet, that trade is now offered in silver.
We can name two reasons why the cobasis might skyrocket. One is that there is a risk. If your counterparty defaults, then you don’t get your metal back. You may get dollars. The exchange will insist the dollars are equivalent to the metal, but that’s small consolation.
We do not believe this is the main problem now, because it’s not occurring in gold. If the banks were in imminent danger, the gold basis would not be quiescent.
The other possible reason is that there’s a growing shortage of silver. Of course, in order to decarry silver, you have to have the metal. If it’s not available, you can just wistfully watch the rising cobasis.
So now, for the first time in about two years, the fundamental price of silver is above the market price, about $0.35 over.
We’re reminded of a dancing bear. It’s not a particular good dancer. What’s interesting is that it’s a bear. And it’s dancing. This is not a particularly big fundamental price premium over market. What’s interesting is that the fundamental price of silver is above the market.
Unless you really like to trade the bleeding edge of a signal change, you may not want to jump in here. Silver’s newfound scarcity could disappear as rapidly as it appeared. And even if it’s stable, it does not mean that the fundamental price must necessarily skyrocket.
We would recommend waiting to see what the markets bring us, not to mention the near-term fallout from Greece this week.
Keith is speaking at FreedomFest this week in Las Vegas.
© 2015 Monetary Metals
- advertisements -


Manipulating gold since at least 1980… Silver since…. Well, spin-up a 500-year silver chart. Manipulated since 1477.
Extraordinary.
is gold scarcity a true correlation (lower prices = greater scarcity) or just market noise. at what price would there be no gold for sale? when the dollar goes to zero? the thought is that if the markets collapse the fed will do more QE and the specs will use that money to buy gold. i cant imagine the fed getting caught in that sort of less than virtuous cycle. of course the fed could shut off the spec trade by raising rates, so hiking rates and restarting QE, in theory you can imagine that, the fed absorbing all those ZIRP bonds in order for the bond market to normalize, while they normalize rates. their balance sheet doesnt have that kind of room but it does fit into the death of the fed by dumping all the bad paper on its balance sheet, and really things dont change, they just get worse. it would be an extraordinary move.
No shit Weiner Sherlock.
Buy a paper contract, collect and sell the phyzz for more (or arb with phyzz from wherever). Cept there is no phyzz backing the paper.
History shows that folks that own PMs suffer less in economic collapses. See recent history of Cyprus, Venezuela, Argentina, etc.
Sorry, I just don't trust the "free" market of Wall Street. Do you need a list of their most recent crimes?
History will now also show that Bitcoin ownership provides the same type of protection going forward.
Bitcoin is being referenced in some mainstream media as a global, "safe-haven" asset in the context of that little Greek/EU calamite. Whether it is or not at this time is almost irrelevant, let that sink-in for a minute or two. Even anecdotally I would think that would make some sit-up and take notice...
Seems to me we have three fat cows eating three skinny cows.
Unprecidented money printing has brought us fat years, since there is no down side to money printing, (ask Weimar), the brainiacs would have you believe there is nothing to worry about. However...
Greece is melting down, Italy and Spain are near the precipice, Puerto Rico is proposing Chapter 9, despite massive intervention China's stock market is in full decline... and the price of PMs is going down.
Our fat years will soon be followed by lean years. Be prepared.
Feeling sorry for PM letter writers at this stage. They seem to be holding their charts up to the light, scratching their heads trying to see some sign of hope. Year Four of the drought, gents.
Silver peaked in April 2011, thus year 4 just ended...math must not be your strong suit.
I feel bad for people like Martin Armstrong and Louise Yamada who are two of the very few people to call a sub-$1300 major gold price correction in 2011 only to be laughed at.
So you must feel even worse for the economists that have been flapping their gums about raising interest rates for 7 very long years.
It's good stacking prices... Major discount in all fiat currencies. If you want (more) PMs start accumulating fizzical now... and/or add on a bit on every decline. Me things a fuse on debt and fiat has been lit... tick tock... good luck to all.
Debt domino's. Cyprus, Greece 2 yrs later, etc. From smaller countries to progessively bigger ones.
NO. We are at all-in costs but that will be busted to mine the rich vein of stop losses and to set up bankruptcies so the cartels can swoop in and buy assets for pennies on the dollar. And the mines will not stop mining if the spot stays below costs. The mines will need the cash flow and will operate at a loss rather than shutter operations - setting up no shortage of inventory - which a lot of PM bulls are counting on to self-regulate the spot price.
PM is a dead market at this time. I will look again at silver at ~ $12, and gold ~$1050.
And exactly how long can mines run at a loss? Only as long as they have capital, and/or can sell as-yet unmined silver forward, and/or someone will lend them money.
All three must (eventually) lead to bankruptcy.
Given that around half of all silver gets dissipited in industrial purposes, never to return, the big question is: when do the mines finally run out of the ability to operate at a loss? At which point their creditors will have their assets, possibly for pennies on the dollar, but only if the price of Ag rises to the point that the mine can be run profitably to meet the delivery obligations of all that forward selling.
Add the drop out of the junior mining and scarcity is moved to a real possiblity. How many juniors can the majors snap up while operating at a loss...I don't know... I have never encountered a scenario quite like the one we face today.
You can't build solar panels and other industrial products with paper contracts. It doesn't matter what happens in Greece.
Sorry but "There are no "Markets", only manipulations". price discovery for a commodity should be driven by supply and demand. In the case of Silver, there is a supply defecit and the "Market" price is below the cost of getting the stuff out of the ground. So, applying common sense, where should the price be? It is very obvious that the Silver "Market" is being manipulated by "Someone" who has a vested interest in preventing it from rising and taking Gold with it, Fundamentals clearly account for nothing and it is the paper futures markets which determine the price. In those same futures markets, despite a declining price of Silver, Open Intyerest has risen to 210K Contracts, or an amount equivalent to roughly 125% of Global annual production. This is absolutely unique to Silver and unprecendented in any commodity market.
As a great believer in Occam's Razor, and I know that the author of this piece does not agree, isn't the simplest explanation for these distortions that "Someone" is manipulating the "Market"? It is now so obvious that I have been making good returns trading Precious Metal instruments based on the net short contract position of the Commercials (And using the profits to buy more physical metals). The manipulation is so bad and so obvious that they obviously don't care (With the ESF being legally able to manipulate any market it wishes and with a captured "Regulator") and actually want the plebs to know that PM's do not represent an escape from the Fiat Banking system. Until they do.
Being in a silver using business, since the early 90s people have been explaining to me how silver is in a serious deficit. Odd that we have not run out by now.
My guess is that they did not accurately account for something.
What silver using business are you in?
Maybe something to do with a trillion in silver backed derivatives? Did not JPM just up their balance sheet close to that figure last week?
It's your call of course but I would suggest that right now is a good time to build inventory. You have enjoyed the good times already so get ready for the reverse side, IMHO. More details about your "Silver consuming" business?
Yes, there had to be much bigger stockpiles somewhere.
I do wonder about the Yamashita horde, particularly with reference to gold. Where has all the phyzz been coming from?
Hmmmm.
Note to self; "Net short contract position of commercial traders and how to trade it". Must learn more.
http://www.nowandfutures.com/images/cot/SI.png
It's really very simple. Futures Contracts are a Zero-Sum game, which means that for every short there must be a long and vice versa. The Commercials (Essentially the Bullion Banks cartel) own the PM markets and control the play for their own profit and as Agents of the Fed/ESF/Treasury/BIS Complex. On the other side of the trade are The Specs (Managed money, Hedge Funds etc.) There are very few other (Genuine) players involved. Genuine producers and consumers of metals are insignificant in the paper markets.
If the price of PM's rises, the Specs are Buying and the Commercials will take the other side of the trade, selling short contracts. This caps the upside move (To please The Fed) which then slowly starts to push prices lower, which results in the Specs first selling their long contracts then going short as the Commercials Buy long, So as the price declines the Commercials go progressively longer until the selling is done and the price begins to rise again. At which point the Specs start to cover the shorts and then go long again with the Commercials on the other side.
So this Wash/Rinse cycle within the Trading Range is absolutely predictable. If the Commercials are at record/high short positions, that means the price will start to fall. The Commercials then make money covering the shorts on the way down. Conversely, if the Specs are at record/high short positions, the price will start to rise as the Commercials make money covering the Spec Shorts on the way up. We are at the latter point now so there should be a rally up to the higher end of the trading range coming shortly, perhaps up to $1250 Au and $17 Ag. That is enough of a range to make monet WITH the Cartel.
The only thing I simply cannot work out is WHY do the Specs continue to be lead around by the nose like this by The Commercials, who always win? You would think that after being on the losing end of this trade consistently The Specs might actually learn? I can only guess that there are many different Specs who cycle through this "Market" and that the Algos have virtually taken over from humans in the Spec space so that there is no more "Common sense" applied. However, trading volumes on Comex ARE ever falling and are now at levels around one half of where they were 5 years ago.
Hope that helps, it isn't rocket science actually...
digging into the corporate interlocking ownership what if we found that both the shorts and the Longs are the same people? That would explain a whole lot.
Discussion of this is standard fare at the Turd Ferguson's Metals Report website.
So what?
Well, you can pay a subscription price to TF and then they will allow you to read his opinions and discuss this.